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One of the essential steps you can take as a business owner is to plan your debt effectively. While debt may not be the most attractive aspect of running a business, it’s often necessary to finance the growth of your company. However, choosing the wrong finance facility or failing to understand the cost of funding can have significant costs, even if it may appear cheaper on the surface.
In this article we will guide you through the process of items to consider for planning your debt strategically, understanding the cost of funding, and making informed decisions about choosing the right financial facility for your business needs.
Understanding Debt and Its Costs:
Debt is not inherently good or bad; it's a financial tool that can be used to achieve various business goals. However, understanding the costs associated with it is crucial. The cost of funding primarily consists of two elements:
a. Interest Rates: Different lenders offer loans with varying interest rates. Major banks and second-tier funders generally have different rates. While major banks typically offer lower rates, they often have stricter eligibility criteria and longer approval processes. Meanwhile second-tier funders have less wait times but higher interest rates.
b. Fees and Charges: In addition to interest, consider fees, such as commencement or application fees, settlement costs, and annual fees, which can significantly affect the overall cost of your loan.
Major Banks vs. Second-Tier Funders: Finding the Right Fit:
A mentioned above, major banks offer stability and lower interest rates, but the application process can be lengthy. Second-tier funders, like online lenders/fintechs or smaller banks and credit unions, might have higher rates but can provide quicker access to funds. It's essential to align your choice with your business's immediate needs and long-term plans.
a. Major Banks: Ideal for long-term, low-cost financing, like real estate or large-scale expansions.
b. Second-Tier Funders: Suitable for short-term financing needs or when quick access to capital is critical.
Avoiding Short-Term Wins at the Expense of Long-Term Sustainability:
One common mistake businesses make is opting for short-term, high-interest loans when a long-term solution might be more cost-effective. Short-term gains may seem attractive, but the cumulative interest and fees can surpass the cost of a more extended, lower-interest loan. Often we see clients that have taken an overdraft or line of credit when they really needed a term loan with set repayments and a cheaper rate.
a. Consider your business's financial health and long-term goals when choosing your financing solution.
b. Utilise financial forecasting to determine the best fit for your business's needs and growth trajectory.
Choosing the Right Facility for Your Business Needs:
The right financial facility aligns with your business's goals and cash flow, and provides financial stability. It’s essential to choose the right finance facility for your business needs to ensure that you’re not paying for services that you don’t need and hidden costs you don’t want.
Here are your options:
a. Revolving Line of Credit or Overdraft: Great for managing fluctuations in cash flow and working capital.
b. Term Loans: Ideal for specific projects or purchases with a defined timeline.
c. Asset-Based Loans: Suitable if you have valuable assets to leverage for financing.
d. Venture Capital or Equity Financing: Consider if you're willing to give up equity in exchange for capital.
For further information on different finance facilities take a look at our article - The Best Finance Options for You Business.
Seek the Help of a Financial Broker or Advisor:
Planning your funding can be overwhelming, especially if you’re not familiar with the finance industry. In this case, it’s helpful to seek the help of a professional who can guide you through the process and help you choose the best finance facility for your business needs.
Planning your business lending is a critical aspect of managing your business's finances. Understanding the cost of funding, the differences between major banks and second-tier funders, and avoiding the allure of short-term wins are key elements in this process. Furthermore, choosing the right loan facility tailored to your business's needs can make a substantial difference in your company's financial health and long-term success. Remember, a well-thought-out debt strategy can be a powerful tool for growth and stability when used correctly. Work smarter, not harder!
If you have any questions or need help financing your business, reach out to us today!
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